Bethpage Federal Credit Union: The Evolution of HELOCs

HELOC (home equity line of credit) is an open line of credit, where the borrowing limit is based on the homeowner's available equity and their financial health. HELOCs tend to have lower interest rates than unsecured personal loans or credit cards and offer greater borrowing flexibility than other types of home equity loans. 

The HELOC interest rate is derived from:

  1. the homeowner's personal credit, debt, and income 
  2. the amount withdrawn or borrowed, and 
  3. the relationship between their current mortgage balances and the assessed value of their home, or Loan-To-Value ratio (LTV). 

Usually, HELOC interest rates tend to be variable (often dependent on the Federal interest rate) and may change every time an individual borrows funds during the draw period. 

However, the HELOC variable rate is now evolving. Now a homeowner can enjoy a fixed-rate HELOC option. 

Why Most HELOCs Feature a Variable Rate

Because lenders can't know how much of a HELOC's borrowing limit will be withdrawn, a variable rate allows lenders to fix the rate dependent on the amount borrowed to control risk. Higher HELOC borrowing can adapt to higher interest rates and when borrowers opt not to take out their full borrowing limit, lenders can apply an interest rate to match the lower risk taken. 

Of course, a variable rate is also often pegged to measures of the national economy - as the Fed rates move up, so will variable rates. This practice ensures minimal risk for the loan across long-term lengths, when economies can shift more dramatically. Of course, when a HELOC variable rate is compared with a home equity loan's fixed rate, many HELOC lenders will offer more competitive rates for similar amounts of borrowing, knowing there is flexibility baked into the variable rate.

With the combination of the moving level of borrowing, for a long time, variable rates have seemed the most sensible way for lenders and borrowers to assign appropriate levels of interest against an equity line of credit. 

Benefits of a Fixed-Rate Loan Option 

Other than providing predictable monthly payments, a fixed-rate HELOC can insulate a homeowner from rising Federal rates. 

More lenders are allowing some or all of a HELOC balance to be converted to a fixed-rate loan, offering borrowers stability in both rate and monthly payments. The emergence of this rate conversion option makes HELOCs even more appealing, as they can begin with the borrowing flexibility to match a fluctuating budget need but offer the stability of a fixed-rate loan.

Lenders will offer this fixed-rate HELOC option both at closing, within the draw period, or even within the HELOC's repayment period. 

Uses for a HELOC 

While HELOCs are traditionally considered for their flexible borrowing options, adding the fixed-rate option to HELOCs makes them attractive forms of equity financing during a rising-rate economy. Beyond these flexible options, HELOCs allow borrowers to use the funds in any way they like. While putting HELOC borrowing towards home improvements may qualify interest payments for tax deductions, there are no restrictions on how to use a HELOC. The most popular options include:

Educational Expenses

As tuition and room & board can fluctuate yearly, HELOCs can minimize withdrawals to match needs. And the borrowing limits of a HELOC are dictated by available home equity, which can allow borrowers to match the costs of rising tuitions.

Home Improvements

HELOCs make a natural fit for home improvements - both due to the eligibility for tax deductions on any interest paid toward the HELOC and because home improvements can increase the value of one's home, which can help to build more equity.

Personal expenses

From weddings to vacations, HELOCs offer a significant borrowing that can be financed into affordable monthly payments. With interest rates that will typically improve on financing with credit cards or personal loans, one can keep borrowing costs down.


Source: Bethpage Federal Credit Union